Intraday Market Thoughts

US Left Out on Stimulus

by Adam Button
Oct 1, 2020 18:58

Hopes for a US stimulus package made no progress on Thursday, but talks will continue. Check out below October's performance during US presidential elections.The kiwi was the top performer while the pound lagged. Gold pushed higher thanks to higher inflation and slipping real rates. Economic data recently has been shining a light on inflation. Friday's US jobs report will not matter at all. Below is the solution to Wednesday's Mystery Chart. The EURUSD's recent moves show tight smilarity with Mar-Oct 2017. You can decipher the rest. 

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US Left Out on Stimulus - Eurusd 50 Ma Overlay 2017 (Chart 1)

The US is at risk of being left behind in this round of stimulus. A number of developed countries are working towards more spending, including Canada and Japan where there were signs of more on Thursday.

Late in the day, there were some signs of an easing in the Senate Republican position, perhaps in light of falling poll numbers. The problem is that at the same time, Democratic numbers are rising and that's less of an incentive for them to compromise. It continues to be tough to see how a deal is made.

The stimulus story is bouncing US stocks around but the FX market has mostly ignored it. A lack of stimulus will certainly raise the stakes for markets in the election. A Democratic sweep would ensure a large package in January, while a divided Congress would mean something significantly smaller.

Growing debt will be a long term problem but it's tough to see the market focused on it any time soon. Instead the next year will be all about growth and money will flow to places that spend and places that benefit from stimulus spending, like emerging markets and commodity FX.

Another spot we're watching closely is economic data. The latest numbers out of China continue to reflect an impressive comeback. There are also great signs on manufacturing in the US and globally. The Markit Canada and US PMIs were strong Thursday. The ISM manufacturing survey was a touch below estimates but still at a very-strong +55.4 level.

One issue that's completely off the radar is inflation. US PCE core rose 1.6% in August compared to 1.4% expected. The PMI surveys all showed pressures as well, with the ISM prices paid component at the highest since October. Much of that comes from supply chain disruption but it risks becoming entrenched but in Q2 of next year we will start to run into some very soft y/y comps, perhaps just as US stimulus starts to hit and a vaccine comes. That's a dangerous mix.

As we enter October, note that it's generally a positive month for the S&P 500 but there is one critical exception: It's usually a poor month in election years.

2016 -1.94% 2012 -1.98% 2008 -16.94% 2004 +1.4% 2000 -0.49%

The other negative headline Wednesday was Moderna saying its vaccine won't be approved for emergency use until at least Nov 25. That leaves Pfizer's version as the lone candidate for before the election.

Finally, quarter-end flows appeared to be a significant drag for the dollar. Even with higher stocks and Treasury yields, USD/JPY struggled. For Q3 as a whole, the euro was the top performer while the US dollar lagged. In stocks, the S&P 500 gained 8.5% and the FTSE 100 fell 4.9%.


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